KARACHI, Sept 23: The Karachi Stock Exchange clamped a ban on blank selling in October future contract and short sale in ready market for one month, effective Wednesday, Sept 24.

The front line regulator said that the step had been taken “in view of existence of an exceptional force majeure market conditions” and that it had the approval of the apex regulator, the Securities and Exchange Commission of Pakistan.

In a late-night announcement on Tuesday, the KSE board said that it had decided to take those measures by virtue of powers vested in it, under the regulation 8.8 of the regulations governing Risk Management of the Exchange.

The two decisions included, firstly to prohibit blank selling in Deliverable Futures Contract for October 2008 as currently allowed under clause 6(1) of the Regulations governing Deliverable Futures Contract and secondly, to prohibit short sale in Ready Market as currently allowed under Regulations for Short selling under Ready Market, 2002 along with the sale with pre-existing interest against purchase on another exchange.

The KSE said that the decisions would be reviewed one week prior to the start of November 2008 Deliverable Futures Contract.

A leading stock broker and former director of the KSE, Haji Ghani Haji Usman explained that the steps suggested that only those shares would be eligible for sale which were held by the investors in the future contract and in the ready market, the borrowing arrangement with a third party, as prevails currently for short sale would no longer be available.

Analysts said that the KSE had probably taken those measures as a sequel to those taken by some major global markets, where they had succeeded in varying degrees to stem the tide of a downward drift of equity markets.

“The major concern on the minds of regulators”, said an analyst “is the possible behaviour of the market post the ‘floor’ removal”.

The KSE on Aug 27 had put a floor on the KSE-100 index at 9,144 levels after the market slumped by 43 per cent in four months and most blue chip stocks lost more than half of their value.

he ‘floor’ placed by the KSE had resulted in a virtual closure of the market, represented by all-time low volumes of around 4 million shares a day and price changes in fewer than 40 stocks among the 657 listed equities. Compared to that, average daily volume last year was around 200 million shares.

Most analysts thought that the steps taken on Tuesday would have negligible impact on the market; one reason being that compared to the developed markets, turnover in futures contracts at the KSE was abysmally low.

The KSE has said it would review the ‘floor mechanism’ on Sept 25. Most market observers, however, believe that until the bourse is able to gather sufficient investor confidence and much-sought after liquidity from the government, the SBP; financial institutions, mainly those under the government control and the pooling of resources by institutions, individual investors and stock brokers, the KSE was unlikely to risk pulling the planks from under the ‘floor’.